Former Autonomy CEO denies HP's charges of improprieties

By Paul Sandle Reuters

Posted:
11/20/2012 08:13:29 AM PST

Updated:
11/20/2012 01:11:46 PM PST

LONDON -- The former head of software firm Autonomy denied on Tuesday that there were accountancy problems at the company he cofounded, after new owner Hewlett-Packard (HPQ) blamed irregularities in Autonomy's books for a massive $5 billion charge.

Irish-born mathematics whiz Mike Lynch, who led the firm when it was sold to HP last year for $11.1 billion, said mismanagement of Autonomy by its new owners was to blame for the decline in its value.

HP said earlier on Tuesday it had taken an $8.8 billion charge in the fourth quarter, most in the form of a $5 billion write-down related to the acquisition of Autonomy. The Palo Alto tech giant said it had discovered "serious accounting improprieties" in the software firm's books and a "wilful effort by Autonomy to mislead shareholders" after a whistleblower came forward.

In an interview with Reuters, Lynch said he was confident he would be absolved on any wrongdoing. He said he had not been notified by HP about the allegation before it was made public, nor had he been contacted by any authorities.

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"We are shocked, this is a big surprise, it's completely and utterly wrong and we reject it completely," he said in a phone interview from a London office where he was meeting with other former Autonomy executives, including its former chief financial officer.

"We have not heard anything from HP, they have not been in touch and we don't know what they are on about," he said. "I fear that this is a bit of a distraction on the day when they produce their worse set of results in the 70-year history of the company."

Lynch said the size of the writedown suggested it was impossible that HP could have missed problems with the accounts during its examination of the books before the transaction.

"Look at the size of the writedown. If you've done meticulous due diligence with 300 people you can't get it that wrong."

Lynch, who has a PhD in signal processing from Britain's Cambridge University, received about 465 million pounds from the sale of his stake in Autonomy to HP last year.

He co-founded the firm in 1996, using technology based on advanced mathematics known as Bayesian probability theory to develop algorithms that can search through e-mails and phone calls. He had grown the Cambridge-based company into a supplier of search software to multinationals and governments worldwide.

However, last year when news of the planned acquisition by HP broke, many financial analysts questioned the deal, with some raising questions about Autonomy's organic growth, its cash conversion and its deferred revenue.

Analyst Paul Morland at Peel Hunt said after the HP bid was announced in August 2011 that it "seemed to defy logic".

"We believe HP shareholders should be worried," Morland said then. "Even before you consider the very high price, what are they going to think when they realise that margins have been contracting, profits are growing in single digits and for some reason those profits aren't converting into as much cash as they should?"

The purchase of Autonomy was the centrepiece of former HP CEO Leo Apotheker's bid to make HP a force in software. Lynch came as part of the takeover, with a remit to build HP's software division. But his relationship with Meg Whitman, Apotheker's successor, soured, and he left HP in May 2012.

He said the real problem was poor management of Autonomy and other acquisitions by HP.

"There was a coup d'etat and you ended up with a lot of internal infighting - which there has been a long history of within HP - and Autonomy got caught in that, and it got buffeted to the point where it lost hundreds of its staff and ultimately its top management team," he said. "They've managed the assets since that point and the results have gone down and down."

HP declined to comment on Lynch's remarks and referred to its earlier statement about the causes of its writedown.

Lynch said he needed to find out what evidence had led to the charge of accounting problems, once the distraction of the earnings report had died down.

"It's really sad for us at Autonomy to have seen the company so poorly managed over the last year, to see so much value destroyed," he said.